Section 39: computation of actual cost of a business asset

The starting point: reductions from actual cost

Section 39(1) reduces the actual cost to the assessee by:

• Any part of the cost met, directly or indirectly, by any other person or authority.
• GST paid, where input tax credit on it has been claimed and allowed.
• Customs/excise duty in respect of which credit has been claimed and allowed under the Central Excise Rules, 1944.
• Any subsidy, grant or reimbursement relatable to the asset's acquisition, received (directly or indirectly) from the Central Government, a State Government, any authority established under law, or any other person.

Cash payments over ₹10,000 are excluded

Section 39(2) excludes from actual cost any payment (or aggregate of payments in a day) exceeding ₹10,000 made to a person for acquiring an asset, if not made through a specified banking or online mode.

Section 39(3) sets out an apportionment formula for subsidies/grants/reimbursements that are not directly relatable to a specific asset, allocating the reduction proportionately across the assets they relate to.

Special situations covered by the Table in Section 39(4)

Section 39(4) prescribes how actual cost is determined in specific circumstances, including:

• Capital asset transferred in a scheme of amalgamation (Indian company to Indian company) - cost carries over as if the amalgamating company still held the asset.
• Capital asset transferred by a demerged company to a resulting Indian company - similarly carries over, capped at the demerged company's written down value.
• Inventory converted into a capital asset - actual cost is its fair market value on the date of conversion.
• Asset acquired by gift or inheritance - actual cost to the previous owner, reduced by depreciation actually allowed/allowable over the years.
• A building put to business use after being held for other purposes - actual cost reduced by notional depreciation for the period before business use.
• Transfer between a holding company and its wholly owned subsidiary (subject to conditions) - cost carries over unchanged.
• An asset reacquired by the assessee after previously being used in the same business - the lower of the original cost (net of allowed depreciation) or the reacquisition price.
• An asset acquired from a previous owner and then leased/hired back to that previous owner - actual cost is the asset's written down value in the previous owner's hands at the time of transfer.
• Assets brought into India by a non-resident and first used for Indian business - actual cost reduced by notional depreciation for the pre-India period.
• Assets acquired under a stock exchange corporatisation scheme, or under Section 46 (specified business capital expenditure) - specific carry-over or nil-cost rules apply.
• Interest paid or payable in connection with acquiring an asset - excluded from actual cost to the extent it relates to any period after the asset is first put to use.

Anti-abuse rule for artificially inflated cost

Section 39(5) empowers the Assessing Officer to determine the actual cost independently (with the prior approval of the Joint Commissioner, per Section 39(6)) where an asset was previously used by another person for their business, and the Assessing Officer is satisfied the transfer's main purpose was to reduce tax liability by inflating the cost for depreciation purposes.

Frequently asked questions